March 8, 2013
By Nevin Adams, EBRI
Last week I was speaking at a conference on the West Coast when a weather pattern emerged that threatened both my connecting flight, and my arrival at home. Alerted to the potential problem, I began seeking alternatives. Eventually, I was able to reroute my connecting flight—though doing so meant a later arrival at my home airport and, based on the trajectory of the storm, that later arrival increased the likelihood of running into problems there.
I continued to check in back home during the day—trying to gauge the storm’s progress, and to (re)evaluate my alternatives. As I boarded that final leg of the trip home, I knew a couple of things: The flight was (still) departing on time, and while it wasn’t snowing at home (yet) the forecast was now for more snow, starting later. The trip home wasn’t exactly restful (despite the hour), but having done what I could to minimize the impact of the storm on my travel, having attended to the things I could control, I boarded the plane, hopeful that the combination of my new route home, the pilot’s skill, and the storm’s track would result in a satisfactory, if somewhat stressful, conclusion.
Earlier this year EBRI was approached by Money Magazine to use the EBRI Retirement Security Projection Model® (RSPM)¹ to evaluate a number of potential retirement preparation scenarios, taking into account varying levels of household income, debt, marital status, retirement plan participation, health, etc. Selected results from that analysis, published in the March issue (see “Dream Big, Act Now: Six Secrets of Retirement” online here), showed the impact that various factors could have on the chances of running short of money in retirement.
Real as those factors are, many of life’s circumstances are completely beyond our control. However, some of the most important factors—including the decision to participate in a workplace retirement plan, or the amount we choose to save—are not. Consider a 45-year-old female worker who is currently making $50,000/year, with a current retirement savings balance of $50,000. Applying the RSPM model,² we find that if she contributes 1 percent of pay to her retirement savings each year, there is a 61 percent chance that she’ll run short of money in retirement. On the other hand, a 10 percent annual contribution rate (which could be her’s along with an employer match) reduces that probability to 38 percent, while a 15 percent annual contribution rate reduces that risk to just 1 in 4 (see chart below).
My flight home from the conference was never risk-free, even before Mother Nature decided to throw a wrench into my carefully designed itinerary. That said, having the potential problem highlighted early enough allowed me to take steps to avoid the worst of what surely would have been a very long and arduous flight home, arriving home two hours later than I had originally planned, but well ahead of my likely arrival had I stayed on my original flights.
Much of today’s retirement planning tends to focus on things over which we, as individual retirement savers, have no control—things like investment returns. Perhaps those looking for true retirement serenity might, like those who invoke the so-called “Serenity Prayer,” be better advised to seek “the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference.”
¹ RSPM grew out of a multi-year project to analyze the future economic well-being of the retired population at the state level. After conducting studies for Oregon, Kansas, and Massachusetts, a national model—the EBRI Retirement Security Projection Model® (RSPM)—was developed in 2003, and by 2010 it has been updated to incorporate several significant changes, including the impacts of defined benefit plan freezes, automatic enrollment provisions for 401(k) plans, and the recent crises in the financial and housing markets. EBRI has recently updated RSPM for changes in financial and real estate market conditions as well as underlying demographic changes and changes in 401(k) participant behavior since January 1, 2010 (based on a database of 23 million 401(k) participants).More information, and a chronology of the RSPM is available online here.
² This application of the RSPM assumed stochastic returns with an average of 8.9 percent for stocks and 6.3 percent for bonds.